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Paying it forward to save on taxes: efficient ways to reduce liability when donating


Many people might think of charitable donations as throwing some coins into a collection tin or cutting a small check for their favorite non-profit organization, but investors should know that there are some efficient ways to significantly lower their taxes by donating in large amounts.

Donations can take many forms, including monetary — such as credit card payments or checks, clothing and other personal items, vehicles including trucks and cars, real estate, stocks and more. With some careful planning, people earning high incomes might be able to secure some major deductions from their taxes, potentially saving them tens of thousands of dollars.

Handing a few dollars to someone outside a supermarket raising funds for a charity won’t have any effect on your tax bill, and isn’t worth tracking as a result. But wealthy investors who are looking to donating to reduce their tax liability should always find out first whether their chosen charity is registered as a 501(c)(3) organization. These are tax-exempt non-profits that may have one or two leading causes, such as protecting the environment or advancing science.

At least 35 percent of wealthy adults who have investment portfolios worth more than $5 million are planning to revise their approach to donating in the future, according to a survey of 200 high-wealth investors as reported in May by the Chronicle of Philanthropy. Just over 50 percent of those surveyed intend to ramp up donations to non-profits and other groups, and an eye-catching 68 percent of investors claimed more generally that they will raise their donation levels.

Given those looming changes, anyone looking to similarly increase their charitable donations in the coming months and years to seek expert advice on the most efficient strategies.

If you have illiquid and complex assets, which can include real estate, cryptocurrencies, private stock in a company and more, consider making a sizable donation directly to your chosen charity. Just note that smaller charities might lack the knowledge or ability to receive this type of donation, because they will not be able to liquidate them.

You could receive an immediate tax benefit by establishing a donor-advised fund, which would act as the entity that formally makes your charitable contributions to designated organizations. There are no caps on how much, or how often, you donate to such a fund within a year, yet choose in later months or years about where to spend the money.

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